GAIN Capital – a tough act to follow

e-Forex talks to Glenn Stevens, CEO of GAIN Capital, a global provider of online foreign exchange services.

First Published: e-Forex Magazine 35 / e-Forex Interview / April, 2009

Glenn, you have more than 20 years of experience in the foreign exchange market. Are you surprised at how much the industry has changed since you started out?  

Absolutely, many of the advancements that have occurred in the financial services industry are due to the Internet – both the connectivity and the increases in processing power that have come from new technologies. It has been a logical progression affecting the equities and the bond markets first, followed by the foreign exchange industry.  The reality of getting 100 shares done for $5 in an equity trade is similar in impact to someone trading a retail size FX contract at interbank spreads without commission. If you look at the initial surge of improvement in online FX, which started around 1998, it was a full decade behind the equities markets.

What surprises me is how well online FX has been embraced over the past several years.  Up until recently in the U.S., equities, real estate and bonds were on everybody’s mind and FX wasn’t even broadly considered. In contrast, international markets like Singapore and the UK have been actively trading FX for a couple of decades.  So, I would say the speed at which the U.S. has embraced foreign exchange trading, with their lack of a head start, is probably the most surprising part.  

GAIN Capital – a tough act to follow

In the past you have referred to yourself as an “FX evangelist.” What did you mean by that and are you still one?

My interest in FX started early – when I came out of undergrad I ended up in a training program that put me on the Forex trading desk at Banker’s Trust and I basically never left.

To me, there are certain kinds of innate virtues in this market that have to do with the global nature of liquidity – and its transparency - that need to be extolled so that people can see the benefits.  

Too often, foreign exchange is looked at as an administrative hassle - something to be outsourced to a so-called expert - or something to be ignored because it doesn’t impact you.  It wasn’t until recently that buy-side money managers, institutional risk experts and individual traders started to realize how much impact Forex trading could have, either by its own alpha-generating capabilities or as a driver of returns on other products. Along these lines, it’s also a true 24-hour market. There are no market imbalances, or exchange closings and you can literally trade straight through the day as the sun goes around the world.  

You joined GAIN Capital Group in February 2000 as a founding partner and managing director, and assumed the CEO role in June, 2007. How would you describe your strategic vision for taking the firm forward? 

In my mind, strategic vision is really a combination of executing on near-term goals while making sure you don’t lose site of the greater trends that are impacting your industry.  This makes it necessary to have a strong team around you (which I do), many of whom have been here since the early days.  The strategic vision of our company is driven by two-way communication between our users and our executives. It involves constant questioning from both sides - "what’s happening in the market right now,” or “what aspects are changing over time?" 

When we launched the company, we completely turned the industry upside down by leaving the RFQ - Request for Quote – model behind and streaming dealable prices out to users because we anticipated that was the way the market was going.

We were actually first in the industry to provide many aspects of real-time FX trading. You can bring game-changing technologies to the market but you must couple them with responsive customer service. This requires participation from all parts of the company. It starts off as the way we offer our services and ends up becoming the mantra for the whole company to follow, which is in essence, our strategic vision.

Over the last few years GAIN Capital has achieved numerous accolades for growth and the firm now supports average trade volume in excess of US$200 billion per month. Few companies in this industry have seen such rapid expansion. Was growth at this pace a deliberate part of your strategy?

Well, the answer is two-fold. Part of it was us successfully executing our corporate strategy, and the other part was the rising tide of an industry that was just starting to gain a foothold in a very wide market. We did not invent this market, nor did we pioneer it in such a way that no other players were involved. I feel strongly that my peer group should get some of the accolades.

A lot of times extremely rapid growth comes from an effective solution to a problem but very rarely do you just pull it out of thin air. More often than not, it’s a latent or potential need that someone in the market fills. In the FX market, it took a provider like us to build on what others had started – providing the right products, offering integrity of service and moving on from there.

How accurate is it to think of GAIN Capital as a technology company and do you view technology as a key differentiating factor that traders should take into consideration when choosing an FX provider?

A lot of what “technology” vendors provide has been commoditized.  Where technology becomes a competitive advantage is when it helps a company be more opportunistic. At GAIN, we constantly look for ways that we can leverage technology to improve our customers’ experiences or to improve our own operational efficiencies. As one example, we have proprietary applications for our own customer service so we can handle customer inquiries in seconds or minutes, instead of hours or even days like many companies in our peer group. This, I think, is where technology can help a company like ours outperform and it is one of the reasons we lead the market in many ways. 

Your company offers a wide range of institutional services including solutions for money managers and a very successful White Label programme. How important has White Labeling become to the business and why do you think it's now proving so popular in FX?   

I think it’s popular for a number of reasons.  When a market starts to gain steam and exhibit the kind of promise that forex trading does, other shops take notice and say, "we can build this ourselves,” or “we can partner with somebody." I think there’s less of a driver to do the former when it’s not obvious that the product fits with your core offerings. 

The second piece for us is when a partner brings synergistic offerings, whether it be through access to their clients, the complementary products they offer, the geography where they have a brand recognition, etc.  As long as the resulting partnership is better than what we could have done on our own, we’ll always consider a white label relationship. For us at GAIN Capital, white labeling is important because it lets us get our product out there and still lets us focus on what we do well.

GAIN Capital's FOREX Trader platform offers streaming executable quotes, one click dealing - and much more. Are you planning on rolling-out any significant new features or functionality to the platform over this coming year?

We are always innovating and releasing new features & tools on our trading platforms. However, in terms of something major coming down the pike, we are preparing to launch a new version of FOREX.com that we believe will deliver a ground breaking online experience for forex traders. The new FOREX.com will offer fully integrated trading, research and account management features in a secure, easy-to-use web environment. The new site complements our existing proprietary trading platform, which was originally developed with a more sophisticated trader in mind.

The new FOREX.com is designed to appeal to a wider audience of retail investors and we think it will attract new participants to the forex market. It’s our experience that many people who are interested in trading currencies find it difficult to overcome the learning curve about this market overall, so we’ve oriented the new website toward training and education, with Webinars, tutorials and product demonstrations that are more helpful and intuitive than competitive offerings.

For clients utilising an algorithmic trading system or their own black box strategy, FOREX Trader supports fully automated trade execution via a standard FIX protocol or web-services API. Do you expect to see increasing demand for automated FX trading solutions, particularly amongst professional traders? 

I think as the industry continues to mature it will be a natural progression for traders to explore other, more sophisticated ways to apply the trading strategies they’ve developed.  The good thing about this is - I’m putting my evangelist hat on for a second here – FX lends itself extremely well to this type of model trading because of the fluidity of its price actions and the 24-hour nature of the market.  

If you look at a chart that has a stock split in it, it will seem out of whack because you are looking at a stock that was traded between $20 and $30 for three years, then it split and it traded between $10 and $20 for another period of time, and you have to figure all of this out. In FX trading, you don’t have these gaps so it appeals very much to algorithmic and rules-based traders.  This does come with its own evolving level of understanding. As users become more familiar with the instrument, they can take on more and more trades, moving beyond the basics of just “click and deal” to try out new and different strategies and ultimately automate those strategies.

As already mentioned, for individual investors, GAIN Capital also operates FOREX.com,  Were you supportive of the NFA regulatory changes concerning FDM capital requirements for firms operating in the Retail FX market and what effect do you think they will have on the industry?

From day one, we’ve aspired to match the greater level of scrutiny put forth by the regulators.  In the U.S., we applied for regulatory status before we were even required to do so. FDM’s were not required by the CFTC when we first started out, but we chose to pursue FDM status.  We’ve always been supportive of increased regulation and I think that anything that can push this market towards a higher level of security and confidence for end-users suits us very well. 

Although all traders will welcome the fact that FDMs will now have a solid financial footing isn't there a  danger that these changes will also lead to significant  industry consolidation within Retail FX  and clients may end up having a reduced choice of platform offerings and miss out on price competition amongst brokers?  

I think consolidation is a foregone conclusion, for two main reasons. Any industry that grows so rapidly will invariably see a lot of competitors enter and not be able to attract enough customers to become a sustainable business.  And yes, evolving regulation and the higher capital requirements is definitely accelerating that to some extent.  Ultimately, the leaders in this market will be determined by their ability to deliver the customer a solid trading experience and good customer service.  Those that don’t actually deliver on their marketing messages will slowly lose market share.  Customers speak with their wallets and their loyalty - it’s very much self policing in that way.

GAIN Capital – a tough act to follow

What are your views on FINRA’s new proposed rule to limit leverage in the OTC spot forex market for transactions conducted with a registered broker dealer to 1.5 to1?

The timing of this proposal will be interesting and I don’t know how far along it is right now.  Obviously, we’ve reviewed it and we’ve contributed to the comments they are collecting in response to it.  I think this is just FINRA’s way of saying that they don’t want to be a safe haven. They want to be able to regulate the products and services that they are familiar with. 

GAIN's customer satisfaction ranks extremely high – for example in a recent FOREX.com customer survey over 90% of your customers said they would recommend FOREX.com to a friend or relative. How has the company achieved this?  

I think this is, in part, philosophical in nature.  Hiring correctly, motivating employees and establishing the right corporate culture are also big parts. There are certain corporate icons, even in challenging times like right now, that are able to maintain a level of service and a level of brand awareness that doesn’t go away.  For example, the quality of an Apple product or a Johnson & Johnson product, or even the quality of a McDonald’s hamburger, isn’t often questioned.  I think this is a testimony to the corporate culture they’ve established. 

The only way you can provide good service to your customers is if the people who are providing the services truly believe in what they are doing.  We spend a lot of time internally trying to make sure that our employees understand the message of the company.  This doesn’t come from the CEO; it comes from the person on the phone with the customer. Our employee turnover is also very low. We have a high-level satisfaction among our employees and that translates to our customers. 

The bottom line is all about developing a strong corporate culture and delivering a great service – it starts first with employees who believe in the company and emanates from there.

Having recognised the enormous potential of the Retail FX market, some banks have started to offer products and services tailored for these traders. Do you view the entry of banks into this space as a competitive threat?

I think the lines are blurring between banks, financial institutions, and firms such as ourselves.  Given everything that has gone on in the last year, there may have been a time when you could look at a competitive threat from a large bank entering your space and say, "gee, they’re going to have an unfair advantage because of their balance sheet, their marketing budget and their brand advantage."  

But I look at it this way – it’s great that they’ve validated the space and the product by coming in and offering it to their customers.  I would say, though, that I’m not so sure how much of a differentiating benefit these institutions would have right now.  If I’m able to provide continuity of service and maintain the quality of my offering against the backdrop of a tumultuous financial climate, then maybe my customers will rely even more on what I provide.  Any market that offers a lot of growth potential is going to pull in competitors.  If that means that it forces the leaders in the market to be even better, good for the customer and good for the leader. In my opinion, we shine either way.

The global economic downturn has seen extremely volatile trading conditions which at times can be tricky for even very experienced professionals to trade through. What steps has GAIN taken to help clients meet the challenges of this turbulent and difficult trading environment?

It is a very delicate process to manage customers in a market like this one. The entire nature of our business is providing a service for what we refer to as self-directed investors. These are people who want to make their own decisions. We are not a money management company or a mutual fund where people are turning over their ability to make investment decisions to us. Instead, they are making them on their own.

Because of that independence, we strive to maintain a balance. We do our best to ensure that our customers are informed about current market conditions so they can quickly adapt when liquidity gets thinner or volatility picks up. On the other hand, to date we have resisted providing what we consider to be exorbitantly high leverage ratios or offering emerging market currencies that don’t always have consistent liquidity, price availability or even transparency. We’ve decided that taking a more conservative approach than some of our peers might make us appear slightly less competitive from a product standpoint but is ultimately better for the customer.

Considerable numbers of investors are now being attracted to FX as an asset class as it has many advantages including product transparency and liquidity. In what ways is GAIN planning to extend your product offerings to cater for new types of investor and do you agree with some commentators that FX Managed Accounts will be one investment strategy that will prove increasingly popular?

We are first and foremost a utility that provides a clearing service and a trading platform that caters to individuals making their own decisions and to professionals who manage other people’s money.
As the market (and this product) has become more highly understood there is naturally more interest from the broader-based investor that didn’t exist a decade ago. This makes the managed product more popular because it’s more accessible for a certain investor who wants exposure to an asset class like forex but doesn’t necessarily want to be self-directed. I think forex is also more popular these days because other investments haven’t fared well recently. In FX there’s no bear market, per Se. Instead it’s about creating alpha which speaks to the general rising tide of FX trading.

GAIN Capital services clients from more than 140 countries around the globe. Which regions do you view as particularly exciting for expanding the company's product and service footprint in the future?

The combination of a developing market – whether from emerging wealth or an emerging financial structure - is an exciting one.  If you look particularly in places like Southeast Asia or mainland China, these are places where, to some degree, the wealth has outstripped the financial structure.  As the financial structure develops, these will be areas we’ll look to increase our presence and develop local offerings so that we’re not just another U.S. product that’s being superimposed locally.  

We have made some significant strides in Europe very recently as well. There are a lot of competitors there and we’ve only recently felt like we had a strong enough product to compete locally.  We are a global company but we want to have local presence for our customer service and for our technology.  

Looking ahead, what do you see as the main challenges facing GAIN Capital as it looks to consolidate on its industry leading position and take advantage of new growth opportunities for the business?

I think this question brings us back to the idea of simultaneously managing the near-term objectives of our customers without taking our eyes off of larger emerging trends.  For example, the ideas of rules-based trading, or algorithms, or API’s - all of these types of direct connections have been gaining steam.  In order to be a leader, you have to anticipate things correctly.  We started working on these projects three years ago so the products would be ready now.  They are not things you can roll out in a month or even in six months.  

One of the greatest challenges is being able to anticipate what will be the next best thing. We don’t have infinite resources as a company, so the challenge will come from identifying the right customer and industry segments, anticipating their needs, and then, obviously, delivering on them, if we want to remain a successful company.